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TMI Blog2003 (4) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... ni at Kurla. PAL entered into a MOU on March 11, 1993, with Automobile Peugeot (AP) to establish a joint venture company known as Kalyan Motors Co. Ltd. (KMCL) for manufacture and distribution of 60,000 Peugeot cars throughout India. Under the MOU, it was agreed that PAL will contribute to the equity of the joint venture company KMCL to the extent. it was engaged in the manufacture and sale of 118 NE cars. PAL also entered into a supplemental MOU with AP on May 17, 1994. PAL also executed a deed of declaration of trusteeship on September 29, 1994, whereby PAL agreed to sell, assign and transfer to Kalyan Motor Company Ltd., its Kalyan undertaking as a going concern on an "as is where is" basis. On October 19, 1994, PAL entered into a joint venture agreement with AP. On January 6, 1995, PAL executed a slump sale agreement whereby PAL transferred and sold to Kalyan Motor Company Ltd., the said Kalyan undertaking as a going concern on an "as is where is" basis. PAL manufactured the body, seats, and various gadgets of 118 NE cars at the Kalyan factory. PAL assembled the said cars at the Kalyan plant. PAL painted the cars at the Kalyan plant. However, the gear box shop for the said ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the value of individual assets is ascertainable? (o) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the apportionment of Rs. 210 crores done by the transferee-company for its accounting purposes should be taken by the Assessing Officer for working out the depreciation allowable to the assessee-company?" Arguments: (A) Challenge to the impugned assessment order Mr. S.E. Dastur, learned senior counsel appearing on behalf of the assessee-PAL, invited our attention to the MOU dated March 11, 1993, between PAL on the one hand and AP on the other hand. He submitted that the object of the MOU was to create a joint venture manufacture of 60,000 vehicles for which AP offered to contribute Rs. 350 crores and PAL agreed to contribute Rs. 210 crores in the joint venture. He submitted that AP offered a good price as AP got a ready facility including infrastructure to manufacture 60,000 cars. He contended that the object of the MOU was to create a joint venture company. That, the total cost of the joint venture was estimated at Rs. 560 crores which included the Kalyan undertaking costing Rs. 210 crores. He contended that prior to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot deal with valuation. That, under clause 3(b)(II), AP was to conduct due diligence exercise. That, under the supplemental MOU, it was, inter alia, provided that the parties shall execute slump sale agreement by September 30, 1994, failing which the MOU and the supplemental MOU would stand terminated. That, the MOU and the supplemental MOU were subject to approval by the Government authorities. Mr. Dastur further pointed out that on September 29, 1994, PAL declared that the Kalyan undertaking will be held in trust and to the account of the new JVC to be called Kalyan Motor Company Ltd. and from that date the Kalyan undertaking will not be held on account of PAL. Mr. Dastur further invited our attention to the joint venture agreement between PAL and AP dated October 19, 1994, which refers to incorporation of a new JVC called as Kalyan Motor Company Ltd. Under the joint venture agreement, the sale of the Kalyan undertaking to Kalyan Motor Company Ltd. was to be followed by execution of a conveyance. Under the joint venture agreement, the scope of due diligence exercise has been carved out. Under the joint venture agreement, the assets of PAL were declared to be free from all encu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst payment related to deposits obtained by PAL from its suppliers. That, under clause 2.C, all costs for dismantling and transportation of acquired net assets up to the site at Kalyan was to be borne by PAL and all costs relating to installation of acquired net assets was to be borne by KMCL. Mr. Dastur next invited our attention to clause 3.6 under which PAL represented to KMCL that the net assets transferred to KMCL had a production capacity of 30,000 vehicles per annum. That, under clause 3.7.1 PAL agreed to transfer its employees of the Kalyan undertaking. Under clause 3.7.2, KMCL agreed to take over such employees with continuity. That, the initial total payroll cost attributable to such employees was not to exceed Rs. 24 crores. Under clause 3.8 of the agreement, PAL was entitled to carry on its residual business of manufacture of Padmini cars. Mr. Dastur invited our attention to clause 3.13(c) which states that the stamp duty on conveyance of land and building shall be borne by KMCL. Mr. Dastur invited our attention to clause 3.15 under which PAL had transferred to KMCL all permits, licences, franchise etc. Under clause 3.22, book debts, accounts receivable, claims and bill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer was based on the report of the valuer of September, 1996. He contended that the MOU was entered into on March 11, 1993, under which the entire Kalyan undertaking was transferred for Rs. 210 crores. That, on March 11, 1993 the report of September, 1996, did not exist. That, therefore, the Assessing Officer was wrong in coming to the conclusion that there was a sale of itemized assets. He contended that this finding of the Assessing Officer was perverse. He contended that if the argument of the Assessing Officer was to be accepted, namely, that because of the conveyance of land and building there was no slump sale then such an argument would lead to an absurd conclusion because in every slump sale there has to be a conveyance. Mr. Dastur further pointed out the perversity of the order passed by the Assessing Officer. As per the report of the valuer of September, 1996, the value of the paint shop was Rs. 70 crores. That, the Assessing Officer has accepted the values of land and building, plant and machinery as indicated in the said report, but when it comes to the paint shop, he reduces the value from Rs. 70 crores to Rs. 68 crores because if he was to accept the sale val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitute of Chartered Accountants, a buyer who purchases the undertaking at a lump sum price is required to apportion the price item-wise. Mr. Dastur next contended that there is a difference between values assigned to the land as the assessee-PAL while applying for certificate under section 230A, has relied upon the valuation of November, 1995, whereas the Assessing Officer relies upon the valuation of September, 1996. Therefore, it was argued that the order of the Assessing Officer was full of contradictions. Mr. Dastur next invited our attention to the audit report of the PPL for year ending March 31, 1995. He pointed out that in this report, there is no sale value of plant and machinery. He contended that the value was not there because the entire Kalyan undertaking was sold for a lump sum price of Rs. 210 crores as indicated by MOU dated March 11, 1993. He contended that on March 11, 1993, PPL was not in existence. He contended that on March 11, 1993, even Kalyan Motor Company Ltd. was not in existence. Mr. Dastur further submitted that even in the balance-sheet of PPL, the fixed assets are valued at Rs. 145.80 crores and not at Rs. 210 crores. That, as per the said balance- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the Kerala High Court in the case of Karvalves Ltd. v. CIT [1992] 197 ITR 95, 103. Mr. Dastur has placed reliance on two judgments of the Supreme Court in the case of CIT v. Artex Manufacturing Co. [1997] 227 ITR 260, 276, as also in the case of CIT v. Electric Control Gear Manufacturing Co. [1997] 227 ITR 278, 281 (SC), which will be dealt with at the proper place hereinafter. (B) Challenge to the findings of Third Member of the ITAT For the sake of convenience, the impugned order is of the Third Member of the Tribunal which is basically under challenge. Mr. Dastur, thereafter, challenged the findings of the Third Member of the Tribunal. In para. 31, the Third Member of the Tribunal has held that the entire land of the Kalyan undertaking was not sold. That, only a portion of the land was sold and, therefore, there was no sale of the Kalyan undertaking. Mr. Dastur challenged this finding on the ground that the Kalyan undertaking was located on a portion of the land surrounded by vacant land. He contended that, even in the past, the Kalyan factory was on a portion of the land which was enclosed by a barbed wire fencing. That, the rest of the land was open. Therefore, Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erative societies and yet, it was held by the Bombay High Court that since the entire branch business as a whole was transferred, it constituted a slump sale. It was argued on behalf of the assessee that it is not necessary that the entire business should be transferred. That, in the case of Narkeshari Prakashan Ltd. [1992] 196 ITR 438 (Bom), the entire business was not transferred. That, only two branches were transferred. That, in this case, the entire business of PAL has not been transferred. That, only the Kalyan undertaking pertaining to manufacture of 118 NE cars has been transferred. It was, therefore, submitted that the basic test in order to be a slump sale was that there should be a transfer of a business and not all the businesses of the assessee. It was argued that PAL maintained separate books for Kurla, rune and Kalyan. It was therefore contended that the Tribunal erred in holding that there was no sale of the entire Kalyan undertaking and therefore there was no slump sale. Mr. Dastur next invited our attention to the finding of the Third Member of the Tribunal which has placed reliance on clause II.2 of the MOU dated March 11, 1993, under which the gear box unit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for obtaining certificate under section 230A but PAL deliberately suppressed the valuation in its MOU dated March 11, 1993, and, therefore, it was not a slump sale. The assessee has challenged this finding as perverse. According to the assessee, PAL had applied for the said certificate under section 230A on the basis of the valuation report dated November, 1995 but the Tribunal proceeds to give a value to the land and building as per the report of the valuer of September, 1996. In the circumstances, it was argued that the finding of the Tribunal needs to be set aside. That, the basic issue was whether, in this case, there is any evidence to show that PAL was aware of the value of the land and building on March 11, 1993. It was argued that the Tribunal erred in coming to the conclusion that PAL was aware of such value by placing reliance on the valuation of September, 1996, which was not a contemporaneous document. Mr. Dastur next invited our attention to the finding of the Third Member of the Tribunal under which it has been held that the due diligence report indicates that apart from description of item-wise assets, a value was required to be given of each item and that PAL had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, etc. In the alternative, Mr. Dastur contended that even if the transaction is treated as a sale of itemized assets still the matter will have to be remanded to the Assessing Officer because the Assessing Officer has not assigned any value in his order to assets such as quota, licences, DGTD registration, etc. That, in this case, the Assessing Officer has only valued the land, building, plant and machinery and the paint shop. That, the overall total price of the slump sale was Rs. 210 crores plus the realized value of net current assets. However, the Assessing Officer has not given any sale value to the above intangible assets. Mr. Dastur pointed out that the Assessing Officer erred in valuing building, plant and machinery and paint shop as depreciable assets and consequently he has erroneously made the assessee liable for short-term gains without allocating the sale value to licences, quota, DGTD registration, transfer of employees and intellectual property rights (hereinafter referred to for the sake of brevity as "other assets"). It was further submitted that there were assets like right to use the name "Premier" by PPL which right belonged to PAL and which is transferred to P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 Peugeot cars. For that purpose, all other items in the proforma have been particularised. He contended that the pro forma had several columns. He contended that due diligence exercise is undertaken for several reasons. That, in this case, it was undertaken to verify existence of assets. In the circumstances, valuation was not on the agenda and, therefore, the column is left blank. He contended that the Assessing Officer erred in drawing an adverse inference against PAL. He contended that the Tribunal erred in holding that PAL had deliberately kept such column blank. Mr. Dastur therefore submits that the above finding of the Tribunal is erroneous. Mr. Dastur next points out that, in this case, if the court holds that there was a slump sale of the entire Kalyan undertaking even then the matter will have to be remanded back to the Assessing Officer because the Assessing Officer will have to decide the question of depreciation. He pointed out that the question of depreciation at this stage does not arise. Mr. Dastur submits that on page 535 of the paper-book, the Tribunal has held that there was no slump sale as PAL carried on business till PPL took over. He submitted that PAL had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its of its customers. Mr. Dastur submits that this finding is also erroneous. He pointed out that these deposits have been received by PAL for advance booking of cars. That, the parties to the contract found that it would be difficult to assign the deposits to PPL because there were large number of depositors and it would be very difficult to obtain their consent and, therefore, a different method of transfer has been evolved under the slump sale agreement under which PAL was to retain such deposits and under which PAL was responsible for implementing such booking contracts up to completion. That, in the event of the booking contract not being performed, PAL had to pay back such deposit with interest to the depositors. Mr. Dastur therefore contended that clause 4.6.1 of the slump sale agreement cannot be relied upon to hold that it was a sale of itemized assets. Mr. Dastur next invited our attention to the finding of the Third Member of the Tribunal at page 537 which states that PAL did not assign loans received by it to PPL under the agreement. In this connection, it was argued on behalf of the assessee that prior to the slump sale agreement, PAL had borrowed loans from the ICICI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was merely a depreciation account in the books of PAL. He submitted that depreciation was only a notional reduction in the value of assets and when PAL transferred the Kalyan undertaking as a capital asset to PPL, there was no transfer of depreciation as an item of transfer. He contended that depreciation was similar to salary which is a charge on the profit and loss account of the assessee. That, such a charge exists only in the books of account of PAL. That, when PAL transferred its work-force to PPL, it cannot be asked as to why salary was not transferred. He contended that salary and depreciation represented charges on the profit and loss account of PAL. In the circumstances, he submitted that this finding of the Tribunal is perverse. Mr. Dastur invited our attention to the finding of the Third Member of the Tribunal at page 538 that PAL did not transfer the liabilities of residual business. Mr. Dastur submitted that this finding was erroneous because, the residual business consisted of manufacture of Padmini cars which has never been transferred to PPL and, therefore, there was no question of transferring liabilities of residual business to PPL. Mr. Dastur contended tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores. He therefore submitted that the finding of the Tribunal that there was no transfer of assets was totally perverse. Mr. Dastur invited our attention to the finding of the Third Member of the Tribunal at page 538 which states that PAL did not transfer its wage liability to PPL and, therefore, there was no slump sale because the entire Kalyan undertaking was not sold lock, stock and barrel. Mr. Dastur contended that this finding was erroneous. He submitted that there were wage settlements under the Industrial Disputes Act between PAL and its employees. That, the work-force of PAL vis-a-vis the Kalyan undertaking was transferred to PPL. That, settlements under the Industrial Disputes Act had to be implemented by PAL. Therefore, it cannot be contended that there was no slump sale. That, one has to take a businessman's point of view and consider the totality of the facts including the terms and conditions of sale. He therefore submitted that this finding of the Tribunal was wrong. Mr. Dastur next invited our attention to the finding of the Third Member of the Tribunal at page 538 of the paper-book which states that, in this case, there were three sales, viz., sale of net cur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly, Dalvi and Associates valued the property at Rs. 43,44,59,477.50 vide report dated November 15, 1995. That, this was the value of the land and building as on September 29, 1994, which was the sale date under the slump sale agreement dated January 6, 1995. Therefore, the Tribunal erred in holding that since there was a conveyance and certificate under section 230A, the assessee was aware of the price of the land and building on March 11, 1993. He contended that in the entire MOU, there is no sale value assigned to the land and building. That, Rs. 210 crores is the sale value for the entire Kalyan undertaking. That, even PPL assigned the value of land and building in its books only after the report dated November 15, 1995, and after the report of Nagarseth dated September, 1996. That, this value has been incorporated in the books of PPL for the accounting year ending March 31, 1997. Mr. Dastur further submitted that, in this case, the Assessing Officer has held that there was a sale of itemized assets. According to the Assessing Officer, the land and building were sold for a total consideration of Rs. 43.85 crores. Mr. Dastur submitted that this value has been taken by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d every item of asset. He pointed out that if the parties had undertaken this exercise then it was impossible to sign the MOU because it would have taken three to five years to verify each and every item. In the alternative, he contended that, even if on March 11, 1993, the assets would have been valued at Rs. 500 crores (by way of an illustration), it would not have made any difference because, under the MOU, the contractual price for Kalyan undertaking was fixed at Rs. 210 crores and, therefore, there was no charm in valuing each and every item of assets. That, the purpose of the due diligence exercise was only to find out the existence and the condition in which the assets stood and whether those assets were capable of producing 60,000 Peugeot cars. That, due diligence exercise was undertaken during the period October, 1995, to January, 1996. That, in the MOU dated March 11, 1993, there is no reference to the due diligence exercise. That, the due diligence exercise came on the scene for the first time under the supplemental MOU of May, 17, 1994. Mr. Dastur, therefore, contended that the Tribunal erred in coming to the conclusion that the value of the asset was wilfully suppresse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act as it stood at the relevant time. Mr. Dastur argued that the judgment of the Tribunal was wrong because the principle applicable for working out the balancing charge under section 41(2) of the Act and the principle applicable for working out the capital gains under section 50 was the same. That, in both the cases the assessee was required to work out the sale price of individual assets. He, therefore, contended that the Tribunal had erred in not applying the judgment of the Bombay High Court in the case of CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438. Mr. Dastur contended that, similarly, the Tribunal erred in applying the judgment of the Supreme Court in the case of CIT v. B.M. Kharwar [1969] 72 ITR 603. He contended that in the case of B.M. Kharwar [1969] 72 ITR 603 (SC), it was a case of a firm which was succeeded by a company and the Supreme Court took the view that in case of such succession, capital gains did not arise. Mr. Dastur submitted that the said judgment of the Supreme Court was not concerning the issue which arises in the present case, namely, whether there was a slump sale. Lastly, it was argued that in this case computation of the capital g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f each item. That if any item is found to be a long-term capital asset then further the Assessing Officer will have to consider indexation of the cost of acquisition and the cost of improvement. In short, it was submitted that the Assessing Officer will have to apportion Rs. 210 crores over not only depreciable assets like building, plant and machinery but the Assessing Officer will also have to apportion the said amount of Rs. 210 crores over all other assets described above. He further contended that the Assessing Officer will also have to decide the quantum of depreciation which the assessee would be entitled to, depending on the question. whether there was a sale of the Kalyan undertaking or whether there was a sale of itemized assets. Mr. Dastur contended that the judgment of the Accountant Member at page 467 of the paperbook is correct. Mr. Dastur contended that the test to be applied in this case in order to decide whether the sale was a slump sale or an itemized sale was the test applied by the Accountant Member, viz., whether on March 11, 1993, PAL knew the value of the land, building, plant and machinery and aforestated other assets and if PAL did not know such value then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaking was not transferred and, therefore, unless all the assets and liabilities were sold it cannot constitute a slump sale. It was contended that in order to constitute a slump sale, there must be a transfer of the entire business on an "as is where is" basis. It was further argued that, in this case, PAL has sold machines which stood in the Kurla unit and the rune unit and, therefore, there was no slump sale. That, PAL was not entitled to sell assets of other business situate at Kurla and rune which they have done in this case. He further contended that, in this case, the total area of the Kalyan unit was 18,000 sq. meters (approximately) whereas under the arrangement only 7,000 sq. meters have been transferred by PAL to PPL and, therefore, all the assets of the Kalyan undertaking have not been transferred and, therefore, there is no slump sale. He contended that if certain assets were retained by PAL then there could not be a slump sale because what is required is a transfer of a going concern as a whole. He contended that, in this case, under the above arrangement, the first step which PAL undertook as a device was to create a new concern by bringing to Kalyan machinery locat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lump sale" under section 2(42C) as the said section did not exist during the assessment year in question. He contended that we have to go by the test laid down by the Bombay High Court in case of CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438, viz., that in order to constitute a slump sale, there must be a transfer of a going concern. Mr. Desai next pointed out that, in this case, all the liabilities of PAL have not been transferred. In this connection, he placed reliance on clause 4.6 of the slump sale agreement to show that deposits received from the customers who had booked cars for purchase have not been transferred by PAL to PPL. That, these deposits have been retained by PAL. That, under clause 4.6 of the slump sale agreement, it is clearly stipulated that such deposits will not form part of the current liabilities transferred to PPL and that PAL shall retain such deposits. Therefore, it was argued that, in this case, there was no transfer of liabilities and consequently there was no slump sale. Mr. Desai invited our attention to clause 2.0 of the slump sale agreement which states that PAL will obtain consent of the lenders of the Kalyan undertaking to MOUify loans given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plus Rs. 37.84 crores. Mr. Desai contended that it is well settled principle of law that if even one of the two items has a value which was ascertainable then the transaction would cease to be a slump sale. He contended that, in this case, value has been assigned to net current assets acquired by PPL of Rs. 37.84 crores and, therefore, the Department was right in coming to the conclusion that there was no slump sale. Mr. Desai contended next that, in this case, PAL did not supply the values to Assessing Officer. That, the values were known to parties when they entered into the MOU on March 11, 1993. That, since PAL did not supply those values, the Assessing Officer has relied on the balance-sheet submitted by PPL in order to arrive at an approximate value in order to compute the liability of PAL. In this connection, he relied upon the findings given by the Assessing Officer at page 315 of the paperbook which states that the net price of the current assets acquired by PPL was Rs. 37.84 crores and, therefore, the value was attributable to the net current assets transferred to PPL and even if one item has a value then the agreement ceases to be a slump sale. Mr. Desai contended that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains tax and, for that purpose, the column has been kept blank although all other columns have been filled in. Mr. Desai contended that, in this case, the basic issue is whether the transaction in question was a slump sale or an itemized sale. That this point was required to be decided by the Assessing Officer by examining the terms and conditions mentioned in the MOU, the supplemental MOU, the joint venture agreement, the slump sale agreement, etc. He contended that all the authorities below have examined the terms and conditions mentioned in the above documents and they have given concurrent findings to the effect that the transaction in question was an itemized sale and not a slump sale. In the circumstances, it was submitted that this court should not interfere with the concurrent findings of fact. Mr. Desai next contended that, in this case, the Assessing Officer has assigned a sale value to land, building, plant and machinery. He submitted that, in this case, there was no need to give a separate sale value to other assets like intellectual property rights, work-force, use of brand name because values of all such other assets stood blended in the sale value of the land, build ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, an assessee has assigned sale values to the itemized assets then the question may arise whether the transaction was a slump sale? He contended that, in this case, on and after September 29, 1994, manufacture of 118 NE cars was transferred to PPL. That, for the relevant accounting period ending March 31, 1995, the turnover in the books of PPL was Rs. 177,26,81,546. That, prior to September 29, 1994, these cars were manufactured by PAL. Therefore, the entire running business of manufacture of 118 NE cars stood transferred to PPL on September 29, 1994, and, therefore, the subject transaction constituted the slump sale. In this connection, reliance was also placed on the judgment of the Bombay High Court in the case of CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438. It was submitted that in the said judgment the Bombay High Court has laid down certain tests to decide whether the transaction is a slump sale. In that matter, broadly, on the facts, the court held that the branch of the assessee had goodwill and, therefore, when the branch is transferred as a whole for a given price, it constituted a slump sale. Therefore, one of the tests applied by the Bombay High Court was tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his case, there is no evidence to show that on March 11, 1993, PAL was aware of the value of each individual asset. That, there is no evidence to show that on September 29, 1994, the parties had evaluated sale of itemized assets. That there is no evidence to show that on March 11, 1993, separate amounts were fixed for plant and machinery, land, building and other assets. He, therefore, submitted that in this case the sale was of the entire business and, therefore, it was a slump sale. Mr. Dastur next contended that on March 11, 1993, the current assets could not be valued and, therefore, in the MOU it has been so stated that the sale value to the current assets would be assigned on the date of sale. He contended that on March 11, 1993, the parties were not even aware as to the date on which the sale would take place. That, on March 11, 1993, PAL did not know the exact date on which transfer would take place. That, on March 11, 1993, PAL did not know the quantum of debtors. That, on March 11, 1993, PAL was not in a position to know the exact price which was to be arrived at on the date of the sale which, in this case, happens to be September 29, 1994. He therefore contended that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of net current assets. This preface is important because in order to judge the nature of the impugned transaction, one must take into account the terms and conditions of the slump sale agreement as also the relevant surrounding circumstances as prevalent on March 11, 1993. (B) Analysis of MOU, supplemental MOU, joint venture agreement and slump sale agreement Before analyzing the aforestated agreements, it may be noted that, in this case, we are concerned with the assessment year 1995-96. During that year, the definition of the "slump sale" under section 2(42C) was not there as that definition came on the statute book only under the Finance Act, 1999, with effect from April 1, 2000. The concept of slump sale initially was evolved under judge-made law which has been subsequently recognized by the Legislature by inserting section 2(42C). Under the said law, the basic test which one must apply to ascertain whether there existed a slump sale is continuity of business. The question to be asked is; whether there is a transfer of a business as a whole? It cannot be disputed that even in the case of a transfer of a business as a whole, there is conveyance of land and building. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of signing joint venture documents by July 31,1994, and to undertake verification of principal assets to be transferred by PAL to its subsidiary viz., Kalyan Motor Company Limited (hereinafter referred to as "KMCL"), which was later called PPL. The verification process covered plant and machinery at Kalyan and also facilities at rune and Kurla. Under the supplemental MOU, PAL undertook to promote a new company in the name of Kalyan Motor Company Limited. The verification process contemplated by the supplemental MOU referred to identification of principal assets to be transferred by PAL to KMCL. In this case, it has been held that the verification process also covered valuation. That, the due diligence report of the transferee showed that there was a separate column titled "value" in the due diligence report which has been left blank. Therefore, it has been held that the values have not been deliberately mentioned though the verification process did contemplate assignment of sale values to each and every item of assets transferred by PAL to KMCL. In our view, this finding is wrong. It is important to bear in mind that the valuation of each and every item of assets would have taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 crores (see letter dated July 6, 1993, addressed by Ministry of Industry, Government of India to PAL granting permission to set up a joint venture for manufacture of 60,000 motor cars per annum with AP of France). Moreover, before the foreign party could enter into the slump sale agreement, it was entitled to know whether the assembly line was capable of manufacturing 60,000 cars per annum. Therefore, clause 2 of the supplemental MOU contemplated verification process. AP could not have made the investment of Rs. 350 crores without checking the status of the principal assets and their capacity to manufacture 60,000 cars per annum. Under clause 3(b)(II) of the supplemental MOU, it has been provided that AP will conduct due diligence exercise of the Kalyan assets and only if AP was satisfied with the due diligence then alone KMCL shall execute a slump sale agreement for the Kalyan business with PAL. This clause is important. It indicates that initially KMCL will get the assets of Kalyan business from PAL and thereupon the slump sale agreement shall be executed and the name of KMCL shall stand altered. Under the supplemental MOU, the parties appreciated the advantages of completing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been provided that the sale of Kalyan business by PAL to KMCL shall be made pursuant to and in accordance with the slump sale agreement. That PAL and KMCL shall initiate filing of applications, obtaining of approvals, etc. in relation to sale of Kalyan business to KMCL. Under article V, after satisfactory completion of the above, KMCL was to change its name to PPL (PAL Peugeot Limited). In the entire joint venture agreement, therefore, there is no evidence of sale of itemized assets. The joint venture agreement is dated October 19, 1994, and the price of Rs. 210 crores fixed under the MOU dated March 11, 1993 has remained constant. There is no clause for valuation of assets in the entire joint venture agreement dated October 19, 1994. That, the joint venture agreement refers to the execution of the joint venture documents by PAL, AP and KMCL in order to effect transfer of the entire Kalyan business to KMCL including the proposed slump sale agreement. Therefore, the scope of the joint venture agreement also does not show valuation of itemized assets being intended by the parties. The nature of the documents to be executed by the contracting parties also indicate transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res (approx.) cannot lead one to the conclusion that there was a sale of itemized assets. Further, the value of the net current assets has no profit element. Lastly, Rs. 210 crores plus the value of the net current assets like stock, raw material, etc., as on September. 29, 1994, represented total consideration payable by KMCL to PAL as a lump sum amount. At this stage, it may be mentioned that under the slump sale agreement a sum of Rs. 13 crores was kept in abeyance by KMCL as there was a paint shop under construction on the date of the slump sale agreement which was to be completed by PAL. However, as per the findings, there was no slump sale as PAL had not transferred the paint shop to KMCL under the slump sale agreement. This finding is erroneous. The Assessing Officer has computed the gains from transfer of the paint shop at Rs. 7.57 crores in his assessment order. Further, under clause 2.C of the slump sale agreement, the parties agreed that all costs relating to dismantling and transportation of net assets to Kalyan from rune and Kurla were to be borne by PAL and all costs relating to installation and putting into operation acquired net assets will be borne by KMCL. Accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the circumstances, we are of the view that reading the agreement dated January 6, 1995, as a whole, it is a slump sale and not a sale of itemized assets. Now, in the present case, under the slump sale agreement, the stamp duty is required to be paid by the transferee on the conveyance of land and building. According to the impugned findings, in this case, there is a sale of itemized assets because a conveyance of land and building was executed on May 27, 1996. This finding is erroneous. As stated above, we are required to examine the entire arrangement consisting of the MOU, the supplemental MOU, the joint venture agreement and the slump sale agreement. On reading the said arrangement, one finds transfer of land, building, plant and machinery as a part of the entire Kalyan business which by itself constitutes a capital asset as defined under section 2(14). As stated above, transfer of land, building, plant, and machinery is there both in the case of a slump sale as well as in the case of sale of itemized assets. However, in the case of slump sale, the transfer of land, building, plant and machinery is as a part of an entire business whereas in the case of itemized sale, the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there was no slump sale as the liability of PAL was not transferred. This finding is equally erroneous. PAL had obtain loans from financial institutions like the ICICI. When PAL signed MOU on March 11, 1993, they had to obtain NOC from the said lenders. Whenever a borrower (including Government of India) seeks substitution of loans, the lenders levy additional interest costs. Without the permission of the lenders, the loans can never be substituted or assigned. In the circumstances, under clause 2.0 what is contemplated is that PAL will obtain NOC from the lenders and the cost up to Rs. 2 crores on account of additional interest shall be reimbursed to PAL by PPL and that too on confirmation being obtained from the lenders that PAL had paid the prepayment cost or additional interest costs to the lenders. In the circumstances, it cannot be said that there was no transfer of liabilities. One has to adopt commercial principles for interpretating such arrangements. According to the next impugned finding, in this case, there was no slump sale as PAL was the owner of the land admeasuring 18.10 lakhs sq. meters at Kalyan whereas they have conveyed to PPL a portion admeasuring 7.23 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assets. It was similar to salary which is a charge on the profit and loss account. Hence, the impugned finding is erroneous. According to the next impugned finding, PAL had failed to transfer its liabilities to the extent of Rs. 13 crores and, therefore, there was no slump sale. This finding is also erroneous. On March 11, 1993, a new paint shop was under construction. The transferee insisted that PAL should discharge its liability to their contractors and that PAL should complete the construction and hand over the newly constructed paint shop to PPL. There were two ways of discharging this liability PAL could have transferred their liability to PPL by reducing the consideration amount from Rs. 210 crores to Rs. 197 crores or PAL could have discharged its liability of Rs. 13 crores by effecting payment directly to its contractors and receiving from PPL full consideration of Rs. 210 crores. PAL opted for the latter option. In the circumstances, PAL agreed to complete the new paint shop and hand over the same to PPL and under the slump sale agreement, till completion, Rs. 13 crores were kept in abeyance. Therefore, it cannot be said that there was no transfer of liability. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect that the French company AP agreed to make an investment of Rs. 350 crores in the joint venture because the other contracting party, viz., PAL had infrastructure to manufacture 118 NE cars at Kalyan, Kurla and rune. That, PPL did not intend to purchase assets individually/separately and that they intended to buy the entire Kalyan business for a lump sum price. Therefore, reading the arrangement in its entirety along with the relevant circumstances prevalent on March 11, 1993, we are of the view that, in this case, there was a transfer of the Kalyan business as a going concern to PPL and that the Tribunal erred in holding that there was a sale of itemized assets. That, mentioning of value/consideration in respect of land or building will not per se take the transaction out of slump sale--CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438 (Bom) and CIT v. Mugneeram Bangur and Co. (Land Department) [1965] 57 ITR 299 (SC). That the assets transferred, constituted running business and therefore there was a slump sale. That, merely because a conveyance of land and building came to be executed on May 27, 1996, it cannot be said that there was no slump sale. If that test is applied t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plant and machinery account, in which debit/credit entries were made as per the figures given on page 341 of the paper-book. Rs. 81.31 crores was the book surplus and not a tax surplus. In order to decide the tax surplus, one has to take into account cost of acquisition of building, plant and machinery, paint shop, etc. Therefore, Rs. 81.31 crores did not represent taxable profits. That, figure represented only book profits. These accounts of PAL support the slump sale agreement. Therefore they are relevant. Under section 2(14), capital asset is defined to mean property of any kind held by an assessee whether connected or not connected with his business or profession. In the case of West Coast Electric Supply Corporation Ltd. v. CIT [1977] 107 ITR 483 (Mad), it has been held that the word "property" in the definition of "capital asset" in section 2(14) would include an undertaking acquired as a whole. Therefore, the Kalyan business acquired as a whole by PPL, constituted property in the definition of "capital asset". In the case of demerger, all assets and liabilities stand transferred at book value. There is no such condition prescribed for a slump sale. In the case of a slump s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es like licences, quotas, permits, etc., all of which have been transferred to PPL and consequently the liability of PAL stood increased arbitrarily. Moreover, there is arbitrariness in the assignment of sale value by the Assessing Officer. For instance, the Assessing Officer has assigned sale values to buildings, plant and machinery on the basis of the report of the valuer of September, 1996. However, when it came to assignment of the sale value to the paint shop, the Assessing Officer, arbitrarily, without reasons, has reduced the value of the paint shop from Rs. 70 crores to Rs. 68 crores although the paint shop is valued at Rs. 70 crores in the said report. The reason is obvious. If the paint shop is valued at Rs. 70 crores then the total of the assigned sale values exceeds Rs. 210 crores and, therefore, without reasons, the Assessing Officer reduces the sale value of the paint shop from Rs. 70 crores to Rs. 68 crores. Further, in this case, the controversy in computation of capital gains by the Assessing Officer is, whether the Assessing Officer was justified in taking into account valuation of assets done by PPL in September, 1996. At this stage, it may be mentioned that PAL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mp sale In this case, we have held that sale of the Kalyan business was for a slump price. In this appeal, we were only required to consider whether the transaction was a slump sale and having come to the conclusion that there was a sale of business as a whole, we have to remand the matter back to the Assessing Officer to compute the quantum of capital gains. For that purpose, the Assessing Officer will have to decide the cost of the undertaking for the purposes of the computing capital gains that may arise on transfer. That, the Assessing Officer will also be required to decide its value under section 55 of the Income-tax Act. Further, the Assessing Officer will be required to decide on what basis indexation should be allowed in computing the capital gains and the quantum thereof. Lastly, the Assessing Officer will be required to decide the quantum of depreciation on the block of assets. It may be mentioned that these parameters which we have mentioned are not exhaustive. They are some of the parameters under the Act. Accordingly, we set astde the order of the Tribunal. We make it clear that section 45 of the Income-tax Act applies in this case. This is on the footing that the K ..... X X X X Extracts X X X X X X X X Extracts X X X X
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